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Creating a link between board performance and pay

At first glance there appears to be little method to the manner in which non-executive directors are paid. Pieter Cox received the highest Rand denominated non-executive fee during 2009, at R3.7m. Cedric Savage received less than R500 000 for a contribution that included 27 board and committee meetings at Harmony. Derek Cooper looks set to receive a R7m incentive payment upon retirement from the Standard Bank board (subject to shareholder approval). It seems evident that levels of pay across industries are inconsistent and confusing, and that non-executive pay is as complex as it is misunderstood.

Numerous issues are at play. Firstly directors’ fees are supposed to be based on contribution and not company performance. The role of the non-executive director is to hold the executive team accountable for their performance and to guide the executive team in achieving the organisational objectives. In this role, non-executive directors are required to demonstrate independence of executive duties. Linking pay to company performance has the potential to blur this primary responsibility.

What then does contribution mean?

Contribution in the form of non-executive directors’ responsibility really means providing exemplary leadership to the organisation. While the notion of contribution is relatively easy to comprehend, measuring contribution is much more complicated. In most instances attendance is used as a proxy for contribution. Directors’ are remunerated a fixed fee based on their attendance at board and committee meetings. The committees that are deemed to be more important generally have a higher fee attached, while chairmanship of committees also attracts a premium. Although this goes some way to accounting for contribution, it is not the answer. Unfortunately this approach does not account for the ‘impact’ that a director has on the organisation; the experience a director has in a particular industry and the vigour and energy that a director displays in carrying out tasks and solving complex problems. This varies greatly from one director to the next, and importantly there is a very weak link between contribution and pay.

A study carried out by Mabili indicates that the vast majority of the level of pay for non-executive directors can be determined by the size of the company (using Market Capitalisation and Turnover as indicators of size), and the level of time involvement in board matters (measured by number of meetings attended). The Mabili study involved numerous multiple regression analyses and isolated these three components as key determinants of non-executive pay. The study indicated that the abovementioned factors account for almost 80% of the variation in non-executive pay.

Size is an important factor as it gives an indication of the complexity of the environment in which a director operates. Furthermore size generally gives a good indication of affordability. Similarly, it could be expected that directors’ time spent working on board related matters is an important indicator of the directors’ contribution. However these factors alone are not sufficient. Mabili believes that individual performance is a critical component of non-executive contribution and should play a key role in determining non-executive pay.

As such directors’ should be subject to rigorous evaluations. These evaluations should extend further than governance requirements and focus on efficacy and director impact. A greater understanding of director performance could create a stronger link between contribution and pay. Importantly, directors’ will gain a greater understanding of their own performance and if managed effectively, will be driven to meet reasonable performance objectives. Similarly non-performance of directors could be managed more effectively, through development initiatives. This approach to non-executive pay and contribution will ensure that the board operates at a level that adds value to the organisation and that the remuneration paid to directors’ is appropriate and meaningful.

The evaluation of board members is becoming a key component of good governance. King III indicates that Board Members should be subject to evaluation and that evaluation should be done by an independent advisor. Mabili’s Leadership Advisory solutions addresses these challenges with its BoardMETRICS solution; a customisable Directors Evaluation solution. The result is a robust understanding of the performance of the Board of Directors. For more information please call Paige Shiller on 011 236 4900 or paige@mabili.co.za.

Developing an effective retention strategy through Total Rewards

What is it that makes some companies so successful at attracting and retaining human capital? You can identify off the top of your head of a couple of companies that you’d love to work for? Maybe you’re lucky enough to be part of one of those ‘employers of choice’. Conversely you may have worked for an organisation, where every day was a drag. You couldn’t wait to get out of the place, and Sunday blues reached unprecedented heights.

What is Total Rewards?

World at Work, the global human resource organisation focused on integrated total rewards, talk about the ‘it’ factor. According to World at Work, the ‘it’ factor may be bringing your dog to work, as in the case of Google, and closer to home, employees of South African Breweries rave about their monthly allocation of beer!

The ‘it’ factor is the unique and proprietary way to attract and retain employees. It is the set of reward factors that make up the psychological and contractual agreement between employers and employees in return for employees time and efforts in advancing the interests of the organisation.

The ‘it’ factor is rarely a single factor, but rather a set of factors that contribute to a unique and meaningful employment proposition. Following extensive research on Retention, the following components appear to be critical to a Total Rewards strategy within the South African context.

Guaranteed package provides entry to the game

Guaranteed package (cash and benefits) provides the foundation on which effective retention strategies are built, and is the number one reason employees are leaving organisations. Mabili’s latest Remuneration Retention Survey indicates that guaranteed package was identified by 71% of the respondents as the primary factor driving retention.

Laurence Grubb, MD of Mabili Reward notes: “The survey affirms our belief that financial rewards play a vital role in retaining human capital, and that getting the financial component right, is an entry ticket to the game.”

In developing guaranteed packages, the majority (61%) of companies pursue a Total Cost of Employment (TCOE) approach, while a further 25% use a combination of TCOE approaches and Base Pay plus Benefits, depending on their requirements. Our research indicates that only 14% of companies use Base Pay plus Benefits exclusively.

In order to manage the affordability of the payroll, best practice suggests paying at the 50^th percentile for the overall organisation, and then developing premium pay strategies for specific groups of employees. These may be ‘hot skills’ - skills that are critical to the business and in scarce supply, ‘high flyers’ – individuals that perform at an exceptionally high level, and equity candidates. With the shortage of skills being a key issue, it is evident that the majority of companies provide premium pay for ‘hot skills’ (60%), while approximately 40% of the companies afford premium pay for ‘high flyers’ and equity candidates. Premium pay generally ranges between 10 – 30%, but can exceed 50% in exceptional cases.

The challenge from a retention perspective is to ensure that the overall pay strategy for the organisation is reasonable in relation to peer group organisations, and that targeted premium pay groups are effectively identified and chosen based on business requirements. Furthermore the execution of premium pay strategies needs to be affordable, and aligned with the scarcity and importance of the designated group.

Incentives engage the mind and drive performance

While guaranteed package provides the entry to the game, incentives go a long way to creating a sense of motivation, commitment, and engagement. It is evident that after guaranteed package, short-term incentives (STI’s) are the second most important factor retaining employees. According to Grubb, “66% of the respondents in our survey indicated that short-term incentives were important in creating effective retention strategies”.

Engagement is the extent to which employees commit their discretionary effort to the organisation and its people and is necessary to drive retention because employees are unlikely to remain in the employ of the organisation if they do not feel committed to their work.

In developing STI’s, the level of payout depends heavily on the type of organisation, the employees’ level within the organisation, and their functional role. Typically, employees at lower levels within the organisation receive short term incentives around the 8% mark (13^th cheque), with mid management receiving approximately 20%, senior management, between 20% - 50%, and executive management between 50% and 100%. Importantly best practice companies ensure that incentives are tightly linked to performance and are justified based on the contribution to the organisation, with reference to specified objectives.

Interestingly the current recession is having a marked effect on the level of STI payouts with the overall STI payout level having dropped from 53% of guaranteed pay to 33% of guaranteed pay, indicating the link between performance and pay, and highlighting the importance of affordability when developing a STI strategy.

Long-term incentives (LTI’s) build on STI’s and provide a longer term view of performance, while at the same time creating a retention platform that expands over a number of years. LTI’s are critical value creating behaviour tools for retention as they encourage employees to align their thinking and role execution, with the business’s long term objectives. Effectively implemented, these tools drive retention within the organisation. Best practice suggests that the most effective LTI tools are Full Value Performance Schemes, Full Value Schemes, and Unit Appreciation Performance Schemes.

Non-financial rewards make the emotional connection

The final component of the rewards model is the non-financial rewards factor. This component is critical in developing the emotional bond between employer and employee, and further drives engagement. The extent to which employees feel emotionally connected to the employer brand is a strong predictor of employee loyalty. The key elements of non-financial rewards include: Development and Career Opportunities, Recognition, and Work-life balance. Mabili’s Remuneration Retention Survey indicated that in SA, the most important element of non-financial rewards is Development and Career Opportunities.

Questions that organisations should be asking themselves include; what type of development priorities are important to the sustainability of the organisation, what development opportunities would our employees like to be exposed to, and how can we align the two. A challenge with respect to development opportunities is that organisations spend money developing employees and then they move to other organisations taking their newly acquired intellectual capital along with them. Importantly, organisations should view development opportunities in relation to career progression and plan accordingly. Thus organisations should develop plans to expand the responsibility and scope of an employees’ role as they are going through the development phase.

In the case of all non-financial rewards, the offering must be clearly aligned with the organisations’ brand and employee value proposition.

Putting it all together

In putting together a platter of Rewards, one must understand that there are numerous components to the Reward mix and that they all contribute to providing a distinct and unique value proposition. Some of the components are highly tangible, while others less so. The Guaranteed portion of the offering provides the foundation on which the rewards strategy is built. Without a robust guaranteed pay strategy, organisations won’t even get out of the starting blocks. The implementation of effective incentive schemes, both short- and long-term, drive commitment and performance, while non-financial rewards are critical in developing an emotional connection with the organisation. Both incentives and non-financial rewards play a role in driving engagement that extends beyond satisfaction.

Mabili’s research indicates that 89% of respondents feel that the current shortage of skills is their most pressing retention challenge. Notwithstanding the threat of increased globalisation, increased business complexity, and intricate EE requirements challenges, retention can be driven by an effective and holistic rewards strategy.

Transactional Leadership vs Transformational Leadership?

We at Mabili have for many years propagated the idea that people are absolutely critical to the success of organisations, whether they are public companies, non-profit organisations, or government institutions. People are the bottom line. We believe that identifying, engaging, and developing compelling strategies to retain people is at the heart of effective leadership.

However there are literally hundreds of definitions for leadership, which vary depending on the situation and context. Remarkably, many of the leadership approaches observed in corporate South Africa are transactional; resulting in structures that drive the leader’s agenda, in return for some reward (usually a salary).

Consider the following true scenario; a leading listed manufacturing firm is dealing with low morale and high turnover. The organisation continues to make reasonable profits but is dealing with significant operational inefficiencies as a result of the organisational climate. Management can’t understand why turnover is so high. They are an ‘employer of choice’ and pay attractive packages. Things don’t stack up?

The reality is that over time, the management structures have become shaped and driven by a transactional approach to leadership. The rewards that the organisation so ‘generously’ provide to the employees, creates a platform for the employer to ignore the employees needs in an attempt to address its own needs. Simply put, the transactional approach leads to an abusive power structure.

We believe that leadership should focus primarily on people. We believe that leadership is about creating an environment that unlocks the expandable, self-generating, and transferable capital of people, rather than attempting to effectively use an exhaustible resource.

Thankfully we have come across a number of friends who advocate similar sentiments, none more compelling than Etsko Schuitema. Schuitema heads up the organisational and business transformation consultancy of the same name, and has developed a framework for leadership known at the Care and Growth™ leadership model.

Importantly, Schuitema indicates that many organisations take a ‘people as resources’ view, and believe that they can buy their resources. This, he notes, is a Pharaoh Model of Leadership, alluding to the Egyptians who were enslaved to build pyramids. Schuitema suggests that the problem with this approach to leadership is that it is self-serving, addressing the needs of the leader at the expense of the people, resulting in grand structures that are of no use to the people.

Schuitema’s research on conflict and trust in management has indicated that power only becomes legitimate where the leader exists to achieve society’s aspirations. Schuitema suggests that the only legitimate power structure is achieved where the leader provides unconditional care, and fair and honest growth for his/her subordinates.

The Care and Growth™ model of leadership is based on the concept of maturation, in which humans move from a state of malevolent dependence to benevolent independence. According to Schuitema, the first stage in the maturation journey is known as infantile attention. It’s selfish and focuses on own needs. The second stage encompassing juvenile and adolescent concern, involves bargaining. In this stage humans learn that they need to ‘give to get’. Service becomes conditional with getting back. Finally maturation is concerned with giving. True maturation sees a move to unconditional giving. Schuitema notes that the journey of maturation is not bound by time, but occurs over these stages.

Similarly, the mature organisation is concerned with generosity. Truly mature organisations exist for a cause greater than profit, and generate value for customers through good corporate citizenship and meaningful stakeholder engagement. It is in this context that we observe transformational leadership; leadership that focuses on collaboration and empowerment, and builds sustainable business structures through committed and engaged human capital.

Executive Pay Packages continue to Level Off

Executive Director pay packages are no longer experiencing the significant growth consistent with the last decade. It is clear that the tightening of the economy is having a noticeable impact on the level of executive pay in particular on the bonuses. Mabili’s Directors’ Remuneration Report for 2009 indicates that CEO’s received an average 11.6% increase for the year under review, taking the median CEO package (including bonuses) to R5.3 million.

According to Laurence Grubb, Managing Director of Mabili Reward ‘This is the third year that we have seen executive directors’ pay increases move closer to that of the general working population. The 11.6% increase indicated in the 2009 report is in contrast to the 24% increase indicated in the 2006 Report.’

An interesting observation of the 2009 Report is the increase in guaranteed pay among executive directors. The Report indicates that the median guaranteed package for CEO’s increased by 23.9% to R3.3 million. According to Grubb, the notable increase in guaranteed packages for CEO’s can be attributed to the influx of new CEO’s assuming office during 2008. The 2008 report indicated a record number of 23 CEO’s resigning. As noted by Grubb ‘The advent of new leadership typically comes with a restructuring of the CEO package. Typically a premium of 15% to 20% on the guaranteed package is paid to new executives to attract them to an organisation.’ The 2009 report has indicated a similarly high level of top leaders moving on. The Report indicates that 21 CEO’s resigned, while a further 3 Executive Chairmen have stepped down from executive office.

While executive director packages have steadied after a period of significant growth, non-executive packages continue to grow at a healthy rate. The growth in non-executive director fees amounted to 20.9%, with a median non-executive fee of R225 000. Grubb noted that the growth in non-executive fees can be attributed to the increasing level of responsibility that directors face in light of the shift towards more effective governance, mentioning that: ‘Fees for non-executives are likely to continue rising steadily with King III further enhancing the role of the non-executive director.’

The 2009 Report indicates that increases for the Chairman of the Board are in line with executives at 11.1%. The median Non-executive Chairman fee amounted to R529 000.

Analysis of pay levels across vertical markets indicates that CEO’s in the Financial industry took home the highest total packages at R6.7 million, while CEO’s in the Basic Materials received the highest guaranteed packages, at R3.8 million. Industrials which have typically lagged behind the top earners, and which showed significant increases in the 2008 Report, have now moved in line with Basic Materials and Consumer Goods as the second highest earning CEO’s behind Financials.

A new development in the report has been the inclusion of the AltX group of companies. This is the result of increasing levels of transparency and reporting among AltX companies and subsequently, more meaningful remuneration data available. Predictably, the AltX group indicated significantly lower Guaranteed and Total packages than any other group.

Much has been mentioned about the ongoing industrial action across many sectors of the working population and the fact that in some cases worker increases, at 12% - 13%, are larger than the increases afforded to executives. Mabili believes that despite this, the wage gap will continue to grow although at a slower rate than previously experienced. The immediate future will see employees at the bottom end of the scale receiving reasonable increases while the premium for leadership will not go away.

Grubb notes that ‘The challenge for both leaders and workers will be to improve productivity. One must realise that South Africa needs to compete against the most efficient countries in the world on a productivity level to remain a competitive exporter. Both leadership and workers will need to show a clear improvement in productivity in order to command higher increases.’

Old Mutual SA appoints new CEO

Leading financial savings and investment giant Old Mutual South Africa (OMSA) today announced the appointment of Kuseni Dlamini as Chief Executive Officer to succeed Paul Hanratty. Hanratty was recently appointed as the Chief Executive of the Old Mutual plc Long Term Savings division.

"We followed an extensive search process internally and externally and we are delighted to make this appointment," Hanratty said.

Dlamini (41) is currently the head of Anglo American’s South African operation. He has held this position since July 2008 after gaining valuable management experience within large multi-national organisations, such as Anglo Gold Ashanti and De Beers Consolidated Mines. More recently, between 2005 and 2008, he was the Executive Chairman of Richards Bay Coal Terminal Company (RBCT), the single largest export coal terminal in the world.

Kuseni graduated from the University of Natal with a Bachelor in Social Science and was a Rhodes Scholar at Oxford University where he did his Masters in Philosophy.

In 2008 he was selected as one of the ‘Young Global Leaders’ by the World Economic Forum and the Mail & Guardian named him as one of the top 200 young people worth taking to lunch.

Kuseni is active in professional bodies which include African Chambers of Commerce and the South African Institute of International Affairs. He is the non-executive director of the National Business Initiative and also a member of the Advisory Council for the Wits Business School.

Taking up his new role on 1 September 2009, Dlamini will be based at the company’s head office in Sandton (Johannesburg). In his capacity as the CEO of OMSA, he will report to Hanratty and be accountable for the South African and African operations of Old Mutual.

Dlamini is keen to take on this new challenge. ‘I am very excited to join a highly esteemed organisation like Old Mutual during what appears to be an exciting time for the financial services sector in SA and elsewhere in the world. Paul (my predecessor) has done a remarkable job which provides an excellent basis to take Old Mutual to the next level in terms of its brand equity, customer focus and the pursuit of excellence in all aspects of its business,’ he said.

Commenting on the appointment, Hanratty said, ‘We are delighted to welcome Kuseni to the Old Mutual Group. He brings wide business experience and fresh strategic and transformation insights. We look forward to benefiting from his leadership of the businesses in South Africa and Africa. We have inherited and grown a fantastic brand in South Africa and as this business goes from strength to strength at home, we are working hard to leverage its capabilities into other markets – to the benefit of our customers, shareholders and South Africa at large.’

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Creating the link between Board performance and Pay

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